The Human Resources Market
The Financial Services Business in Japan - 3
～ Demand dramatically expanding for talented people ～
Executive Search Partners Co., Ltd.
Founder & CEO
Table of Contents
Summary of the Report Ｐ.１
Chapter Ⅰ Analysis by Financial Product Ｐ.３
１．Investment Banking Business Ｐ.４
General Coverage and Underwriting Ｐ.８
２．Investment Business Ｐ.９
Distressed Business Ｐ.９
Turn-around Business Ｐ.９
Private Equity Ｐ.10
Principal Investment Ｐ.12
M&A Support Funds and Anti-TOB Funds Ｐ.12
Activist Funds Ｐ.12
Venture Capital Ｐ.13
Real Estate Investment Funds Ｐ.13
３．Asset Management Business Ｐ.16
Conventional Asset Management Ｐ.16
Alternative Investment Ｐ.17
４．Credit Risk Business Ｐ.20
Understanding on credit risks Ｐ.21
Challenging high credit risks Ｐ.22
Trading credit risks Ｐ.23
Analysis on credit risks Ｐ.24
LBO/MBO Finance Ｐ.25
Asset Finance Ｐ.25
Mezzanine and Subordinated Loans Ｐ.26
Asset Backed Securities (ABS) Ｐ.27
６．Syndicated Loans Ｐ.27
７．Bonds/Derivatives/FX business Ｐ.27
９．Wealth Management Ｐ.29
Chapter Ⅱ Analysis By Financial Institution Ｐ.30
１．Mega-bank reform and the demand for people Ｐ.30
Demand for people Ｐ.32
２．Foreign financial institutions and the demand for people Ｐ.34
Demand for people Ｐ.34
Profile of the writer Ｐ.37
Company statement and purpose Ｐ.37
Finally, the decade-long and nation-wide problems of overly capitalized investments,
growing unemployment and excessive debts in Japan have basically been solved, and
the Japanese economy has begun to recover steadily. Japanese mega-banks are now
shifting their management focus to the profitability of the profit and loss accounts
from the soundness of the balance sheets. Reflecting these changes, the Japanese
equity market has grown by about 40 % during 2005. As such, last year was a turning
point for the Japanese economy after undergoing ten years of financial struggle.
Under this situation, the Human Resources market for the financial services business
has expanded explosively, changing dramatically both in quantity and quality.
This REPORT is written as a series of HR market reports, which began in 1994 when
the writer joined his former company, Heads Japan. This REPORT is the third version
at his new company, Executive Search Partners (ESP).
The REPORT describes the financial services industry in Japan from a human resources
perspective for the latter half of last year.
Summary of the Report
The summary of this REPORT is as follows.
(1) The Japanese financial services industry has been taken over by the three
mega-banks as an Oligopoly. Japanese banks unburdened by excessive bad loans are well
regarded and trusted in this market, and in fact, the three mega-banks has been flooded
with huge influx of customer business. Therefore, demand for people at the three
mega-banks and their affiliated securities firms was extremely strong. At the same
time, we saw a difference among the three mega-banks in their hiring policies in line
with the reform strategy of each bank.
Meanwhile, we did not see same positive outlook for foreign financial institutions
in general as we saw in 1990s. In those days, most foreign firms hired many
professionals in most areas including trading, sales, fixed incomes, and investment
banking, thus earned a great deal of profits. However, we now see a big difference
between major U.S. investment banks and the other financial institutions in operating
their Tokyo offices. The top-tier investment banks are still very active and are
producing huge profits, and the rest are struggling to survive, and some of them
decided to leave the Japanese market. However, under the changing market environment,
even top-tier investment banks are also forced to change strategy and focus on their
particular strengths in business. For example, a U.S. investment bank does not expect
much from customer business now, and concentrates on principal investment by investing
its own capital in targeted assets such as golf courses and resorts. The firm still
earns a huge profit in the business.
It is widely recognized that only top ten to fifteen foreign financial institutions
could survive in this market.
(2) Dramatically expanding M&A
As we saw in the media, major hostile takeover battles took place in 2005. As such,
M&A transactions by Japanese corporations expanded reflecting the steady recovery
of the Japanese economy. We will see the same trend in 2006 since capital cost
management policy will be adopted more by Japanese corporations under the new
corporate law taking effect on May 1, 2006. Demand for people in this business was
for those who had capabilities to propose valuable ideas on customers’ M&A strategy
and in-depth knowledge of various types of financings as well as an extensive network
of investment funds with which to cooperate.
(3) Fund Capitalism
Fund investment expanded reflecting excessive liquidity on a global basis. The market
has named it “Fund Capitalism.” This business also showed a strong demand for
professionals. The investment business includes buy-out funds and hedge funds as
alternative to conventional asset management.
(4) Structured Finance and Credit Risks
When bankers are engaged in M&A, fund investment, and asset finance, they provide
financings aiming to improve investment return. Financing for those transactions
comes in the form of loans or through securities underwritings, by taking high credit
risks. In need were bankers who can analyze and handle high credit risks involved
in such transactions. The credit derivatives business (credit default swaps) also
Since the Japanese financial services business recovered, there was a good demand
for talented people even at the traditional fixed incomes/derivatives business and
Chapter Ⅰ Analysis by Financial Product
The chart below shows the number of assignments to ESP as of the end of December 2005.
Assignments of ESP (As of December 31, 2005)
Business Number ％ Products
Investment Banking 16 26.2 Coverage, M&A, underwriting, IPO
Structured finance (ABS), M&A finance, high yield
Structured Finance & Credit 14 23.0 finance (mezzanine), PFI, syndicated loan, credit
Alternatives, hedge fund, asset management, mutual
Asset Management 8 13.1
Market Risk Business 8 13.1 Derivatives, structured bond, JGB, FX
Investment Business 6 9.8 Buyout, fund or principal investment, VC
Real estate investment, securitization, execution.
Real Estate Finance 5 8.2
private fund, ＲＥＩＴ
Others 4 6.6 Equity, research, operation, others
Total 61 100.0
1. Investment Banking Business
The Japanese capital market was very active in 2005, and the year was named “The
Opening Year of the M&A Era, ” reflecting the strong recovery of the financial
positions of Japanese corporations. Significant events seen in the market were the
takeover battles between Livedoor Co. and Fuji TV to acquire Nippon Broadcasting
System, Inc., and the Rakuten Inc.’s merger bid for Tokyo Broadcasting System, Inc.
(TBS). These events urged many listed companies to take measures to protect themselves
from hostile takeovers. This situation kept many foreign investment banks and Japanese
securities firms busy in providing advisory services for their corporate customers’
self-defense. It also created a great deal of demand for talented people. What were
required for candidates working in this area were not only expertise in this business,
but also a strong sense of mission and the will to protect corporate clients from
hostile takeovers, by enhancing corporate value. In early 2006, the Livedoor scandal
was revealed. Executives of the firm allegedly manipulated the stock market by using
illegal capital transaction schemes to artificially inflate the firm’s level of
capitalization. They reportedly took advantage of loopholes in the securities laws.
We expect the government authorities to take prompt measures necessary to fix the
M&A transactions increased significantly in 2005. According to Thomson Financials’
statistics, the total value of M&As completed stood at 20 trillion yen on a public
basis (this includes the merger of Mitsubishi-Tokyo and UFJ Group), a 109% increase
from the previous year. The number of transactions was 2,552 on a public basis, a
23.3% increase from a year earlier. The Japanese M&As ranked no.3 on a global basis
in terms of value, following the U.S. and U.K., and ranked no.2, next to the U.S.
in terms of number of transactions. However, the value of Japanese M&As accounted
for only 4 % of Japan’s GDP, as compared to the M&As accounting for 10% of the U.S.
and 23% of U.K. GDP. Therefore, we believe the M&A in this market has more room to
expand. Such strong demand for professionals in the M&A business was reflected to
that largest number of assignments to our firm (as seen in the chart).
(Demand for people)
The significant aspects and details in demand for people are as follows.
① M&A involving investment funds expanded, standing at approximately 2 trillion
yen in 2005, which accounted for about 10% of all M&A transactions. Number of
transactions grew to 358, up 21% from a year earlier. In particular, MBOs were pursued
with fund support in many cases: in some MBOs, funds lead the buy-outs. Therefore,
candidate requirements for M&As included an extensive network of funds to cooperate
with. In return, the candidate requirements for fund investment included having a
strong network with M&A professionals. M&As and the fund investment business were
The details of fund investment business will be reported later in this REPORT.
② M&A deals offered together with financing increased, as were deals supported by
investment funds. There are various methods used for acquisition, such as the use
of cash on hand, acquisition funds procured by bank borrowing, issuance of debts and
equities, and through the creation of a holding company over the two operations. M&A
bankers tend to offer financing arrangements since simply arranging M&As does not
generate sufficient fees for them. Financing includes buy-out finance, mezzanine
loans, MSCB, DCM, and ECM. Japanese banks provide simple financing while foreign
investment banks offer sophisticated schemes. Both domestic and foreign banks earned
handsome profits from this business.
The financing details will be reported later.
In addition to offering financings, some foreign investment banks encouraged other
departments within the bank such as the fixed incomes/derivatives department to
cooperate with the M&A department to obtain more profit opportunities. They were well
aware that M&A is not profitable without offering combined products such as
derivatives. They believed such a strategy follows customer needs as well. It must
be pointed out, however, that they have to conduct the business carefully avoiding
any conflict of interest issues.
③ As we will explain in the ChapterⅡ, currently almost of Japanese financial
businesses are given to the Japanese mega-banks, and dramatically increasing number
of Japanese M&A deals are first brought to the front desks of Japanese banks. These
opportunities range from big to small. They are separately handled by the bank or
the securities firm within the group depending on the size of transactions. The basic
rule is that M&A deals with the potential to earn more than 20-30 million yen in
revenues are handled by securities firms, while smaller ones remain at banks. One
of the reasons why many M&A opportunities flow to mega-bank groups but not to foreign
firms is that major foreign investment banks will not take M&A opportunities from
which they cannot expect fees of more than 1-1.5 million US dollars.
Among the top ten M&A firms on a transaction disclosed basis, six were foreign
investment banks, two were mega-bank groups’ securities firms, and another was Nomura
Securities. Number of M&A transactions completed by three mega-bank groups’
securities firms was three times larger than that of foreign investment banks. However,
total value of deals completed by the mega-bank groups’ securities firms amounted
to only 80% of total value of M&A transactions completed by the foreign investment
banks. This clearly indicates that foreign investment banks focus on big deals. In
addition, some market players pointed out that the mega-bank groups’ numbers were
actually much larger than the reported, since the figures only reflected the
transactions on a disclosed basis.
④ Market sources have pointed out that the focus of M&As in 2006 will be shifted
from “ restructuring troubled companies ” to “ strategic selection and
concentration .” This change reflects improving financial conditions of Japanese
corporations so that they can afford to allocate more resources to pursue strategic
investments. The implementation of the new Japanese corporate law taking effect on
May 1 will accelerate this trend. Therefore, hiring of professionals will target those
who can make valuable proposals to customers according to the prospect’s specific
capital strategy as well as financial restructuring.
However, some in the market are skeptical of the view that M&As in 2006 will increase
dramatically. They pointed out that the traditional Japanese corporate culture still
effective in this market will be a firm obstacle to the increase of M&A deals, for
a couple of reasons. For one, Japanese corporations are not truly convinced of this
new capital cost strategy, and are unlikely to sell non-core subsidiaries and
divisions as long as they generate profits. Capital efficiency is not the first
priority for the Japanese firms. Also, executives at Japanese corporations still
believe human resources are the most important asset for a company, viewed almost
like family, and that they should not be sold to other firms. We share the same view
with the above concerns.
⑤ Most financial institutions engaged in M&A business, either foreign firms or
Japanese, have announced that they will not support hostile takeovers but rather would
support defensive M&As. They believe hostile takeover attempts will not succeed as
have been seen both in the U.S. M&A business and in the case of the Rakuten Inc.’
s bid for TBS. Here we believe that acquisitions should focus on and secure corporate
value (knowledge value) of the targeted company if their goal is to expand business
through acquisition, and that acquisitions should not be driven purely by desires
for shares or financial assets. Even if more than 51% of shares of a targeted company
have been purchased, particularly at software and high-tech firms, this does not
necessarily mean total corporate value has been acquired. The real value of a
corporation is largely owned by employees in those businesses. The acquisition of
more than half of the shares cannot buy the mind of people.
As Peter F. Drucker has said, the core value of a corporation in today’s knowledge
society is its human resources. Today’s capitalism is very different from the
traditional “industry-led capitalism,” where the chemical and heavy industries lead
the economy. Therefore, management now has to pay more attention to the value of human
resources. Failures in recent takeover attempts indicated that the top executives
of the acquiring companies did not understand the essence of this post-modern view
of corporate value. According to statistics, the corporate value of no more than 50%
of U.S. companies merged with other companies had increased after the merger. We
believe this indicates the inherent difficulty of M&A transactions, and M&A
professionals have to take this into serious consideration.
⑥ Japanese mega-banks now plan to expand M&A activity at their overseas offices.
They are seeking to hire foreign M&A professionals with excellent track records for
cross-boarder M&As. What we would point out here is about the market’s assessment
on the M&A business of Japanese financial institutions and their systems. To be frank,
the market rates it very low. Denying his interest in the M&A position at a Japanese
firm, a top-level foreign professional commented to us, “ Japanese financial
institutions have neither the capability to conduct global M&As nor have any
philosophy and commitment necessary to pursue M&A and investment banking. Japanese
financial institutions are just pursuing mandate-hunting for deals. Working at a
Japanese firm would hurt my professional career.” Managements of Japanese financial
institutions must listen closely to this comment.
⑦ As for compensation for M&A professionals, we understand that M&A deals at either
foreign or Japanese firms are pursued by a team, not by a player. In fact, we saw
most recent M&A deals concluded, not by individual super-stars, but through brand
names and general capabilities of the M&A firms. Therefore, compensation of players
in M&A tends to be determined by quality assessment. In other words, basic salary
and bonus of players are determined generally by his or her seniority in the group.
This trend was particularly evident at Japanese financial institutions.
General Coverage and Underwriting
Japanese corporations have suffered from serious financial problems for many years,
and have undergone severe blood-shedding through debt-restructuring. As a result,
they now have huge amounts of cash on their balance sheets. At this time, the excessive
cash possession is regarded as evidence of poor management of their assets and capital,
and firms have become targets of takeover bids by activist funds. Therefore, cash-rich
corporations seek advice and support of Japanese or foreign investment banks, to
protect from hostile takeovers or to learn about a proper capital policy. In fact,
demand for coverage bankers for these jobs rose largely at Japanese mega-banks in
2005, rather than at foreign investment banks. Japanese mega-banks took advantage
of their close relations with corporations, showing that the traditional Japanese
banking system is still effective. As a matter of fact, a recent market survey
confirmed that “main banks” were expected to take such roles for possible takeovers.
Therefore, banks had a great deal of demand for professionals possessing experience
in capital policy advisory. As for the securities underwriting business, market
professionals said that demand for financing would be for debt finance rather than
for equity finance in 2006, as corporations, in general, would need to raise their
debt ratio. As a matter of fact, the total value of equity finance deals in 2005 was
4-5 trillion yen, a 25% decrease from a year earlier. The demand for people would
reflect this trend in 2006.
In 2005, 158 IPOs were completed, down seventeen from the previous year. Total value
of these issues stood at 763.1 billion yen, a 44% down from a year earlier. The listings
were handled by 25 securities firms, including internet securities firms. Some of
these internet firms did not conduct appropriate screening for the issuers ’
eligibility, and created a bad image for their IPO business. Therefore, their hirings
were not successful. Another reason for their problem in hiring was that market players
did not consider IPO underwriting for a business of internet securities firms, even
for small deals, and that the focus of internet securities firms should remain with
2. Investment Business
Investment Business in this analysis includes such areas as distressed business,
corporate turn-around funds, regional reconstruction funds, real estate investment
funds (private and public), orthodox private equity funds, general buy-out funds,
activist funds, principal investment by securities firms, and venture capital funds.
Those are the businesses that invest funds in targeted companies and assets according
to their own philosophy, restructure balance sheets, improve cash-flows, introduce
new business models, and collect invested funds by selling-out.
Investment business grew under the affluence of money both in global and domestic
markets amid scarce investment opportunities. In addition, this business was driven
by the fact that financial institutions, particularly foreign investment banks, did
not secure enough profits through the M&A advisory and fixed incomes/derivatives
businesses as they had enjoyed previously. They had no other choice but to take risks
investing their own capital.
Following is an analysis on the investment business by investment style and the demand
Distressed business did not have demand for people. Some major foreign investment
banks once created huge profits in this business, and profitable traders of distressed
assets were paid a big bonus. Just about one year ago, the writer suggested a young
trader to prepare for his next career step since Japan’s bad-loan problem would be
solved sooner or later. He did not listen to the suggestion, arguing he would continue
trading as long as it makes money. Then, he was forced to leave the firm due to his
poor performance. The writer wonders where he now works.
Turn-around business’s time has also basically come to pass. The Industrial
Revitalization Corporation, a government-support entity and a symbol of
revitalization funds, will be disbanded one year earlier than originally scheduled.
The Corporation had selected 41 troubled companies by the end of Mach 2005 and decided
to invest in them approximately 1 trillion yen. The Corporation will reportedly
register profits. To be frank, we are not sure at this moment that they have fulfilled
their mission. The Corporation originally planed to invest 10 trillion yen provided
by the government, and the market initially expected the entity to play a significant
role in revitalizing many troubled businesses throughout Japan. However, the
government now argues that the Corporation will cease its operation earlier than
originally scheduled, because there are no more major bankruptcy concerns,
particularly among big firms. However, we see there are still so many troubled
middle-sized and small companies in the market experiencing difficulties. The
Corporation had dealt with only big firms, and Japanese banks are said to be still
struggling with a huge number of small troubled companies behind the scenes..
As a whole, demand for people in this business declined.
It is said there are approximately 50 “active” buy-out funds, either domestic or
foreign, excluding real estate funds and venture capitals. Our analysis here focuses
on the “orthodox” private equity and the so-called “independent” buy-out funds.
The inception of full-fledged private equity fund activities goes back to around 2000
when The Carlyle Group opened its Tokyo office. In the beginning, they faced difficulty
in finding investment opportunities and were struggling, but recently, most of these
funds have found a good number of investments. But each fund operates at a different
pace. One fund has established its fourth fund, and another fund has not withdrawn
all of its first fund yet. The size of each fund is usually 50-100 billion yen.
According to statistics, private equity funds invested 1.4 trillion yen in 2004 and
1.2 trillion yen in 2005 (Jan.-Oct.). Some funds have moved to the “exit” stage
and sold investments to other funds or succeeded in IPO. Those “exits” amounted
to 200 billion yen in 2004 and 300 billion yen in 2005 (during the same period as
above). This trend will continue in 2006.
However, competition is intensifying and earning a good profit is becoming more
difficult in this business. The keys for these funds’ success are to secure : ①
the capability to find investment opportunities, ② the capability to manage the
companies invested in through hands-on efforts, ③ the capability to improve the
business through restructuring and to strengthen the business model by introducing
new business opportunities, etc., ④ the capability to lead to “ exits ” by
selling-out or IPO. I other words, the success of private equity rests heavily on
the capabilities of key players. With competition intensifying in the private equity
business, a reputed player commented that probably 70% of the 50 to 100 funds currently
in operation would leave the market within a few years.
(Demand for people)
As reported earlier, buy-out funds in general have operated successfully so far. Some
funds have successfully sold out investments to other funds or have completed IPOs,
and hiring needs have generally been fulfilled. But we do not believe the Japanese
private equity industry has met the expectation of the market. The amount of investment
by private equity funds is only about 1 trillion yen annually. This figure is too
small relative to the Japan’s GDP, comparing to the figures of major countries in
terms of private equity investments relative to their GDPs. It is understandable that
private equity management firms pursue this business trying to maximize their
investment return for investors. But we would feel disappointed if they do not
prioritize playing a social role driving recovery and growth of the Japanese economy
as well. Some investment funds such as KKR plans to invest in the Japanese market.
We expect them to take aggressive stance in investment, by not simply calculating
investment returns but by playing social roles and producing more HR needs.
The most important strategy for private equity in Japan is to strengthen sourcing
capability. Therefore, the targets for hiring were those who have a strong network
of possible investment targets as well as with M&A professionals at investment banks
and mega-banks for sourcing purposes. Private equity investment managers are expected
to find investment opportunities through his or her personal relations, avoiding
competition with outside bidders at auction. Another important qualification required
for them is communication skills they use to negotiate with the invested company’s
managements after acquisition. They have to propose drastic restructuring plans on
finance, HR management, and business strategy, and to convince managements and
employees to accept these changes. The big difference can be seen in capabilities
and personalities between those who joined from M&A business and those who were
originally private equity professionals. M&A professionals are often hired for their
strong sourcing capability, but we have sometimes seen former M&A professionals
causing confusion to the invested companies due to their straight-forward negotiation
style. Therefore, proper candidates for private equity had to possess both
capabilities required at M&A and private equity.
Only strong demand for people was for young execution staff. Their jobs include
due-diligence (in accounting, tax, law, HR), cash-flow projection, valuation of the
firm or its assets, restructuring its financial positions, etc. What we often saw
at recent private equity firms, and understand it as a reason for the rather strong
hiring need for young staff, was their frequent leaves for other opportunities. We
believe such high turnover by young staff reflected recent changes of young bankers’
Some major Japanese securities firms and foreign investment banks actively invested,
using their own money i.e. principal. Principal investment is pursued given more
flexibility in investment decisions than fund investment, since fund investment is
operated with strict conditions given by investors. Principal investments do not have
to invest if no attractive investment opportunities are available. However,
investment with own money has to be made in consideration of the ROA and ROE
requirements for securities firms. Therefore, principal investments tend to invest
in opportunities with high risks/high return, or those that have to sell out
investments in short period. Therefore, those firms frequently appeared in the media
in acquisition battles. Such investments by securities firms should be regarded
trading rather than investment. There is a good deal of demand for the experienced
people in principal investment, but it is not easy for job applicants to succeed since
the firms are very selective in hiring. They, in general, prefer faster-paced people
compared with the orthodox private equity.
M&A Support Funds and Anti-TOB Funds
Several financial institutions such as Japanese mega-banks, trust funds, and insurers
established funds to support M&As. The funds are to support customers’ acquisition
plans or to protect them from hostile TOBs. But Japanese financial institutions in
most cases moved internal commercial bankers to these jobs. Therefore, although the
size of the fund is quite large, we are skeptical that they can make a big impact
on the market.
PBR below 1 is said to represent poor management. About 30% of Japanese listed
companies registered this figures in early 2005, and over 300 companies were still
in the category at the end of last year. To them, activist funds suddenly became
shareholders and requested to pay out excess cash and securities investments on the
balance sheets, claiming that those were inefficient investments. This action could
be highly appreciated in light of improvement of Japanese corporate management and
globalization of the Japanese capital markets. However, these proposals do not
necessarily boost corporate value. To the contrary, pay-outs of cash as dividends
could be regarded as a decrease in corporate value of the invested company. If activist
funds work only to make money for themselves, they would lose social support in the
As we explained above, numbers of young staff at orthodox private equity management
firms left their firms. Since the private equity business usually takes five to seven
years from investment to exit, young execution staff are not patient enough to be
engaged in a particular invested firm for such a long term. Some of them wanted to
move to activist funds, which they believe pursue shorter cycle of investment. In
other words, the retention cycle for young bankers is becoming short under this rapidly
changing environment in the financial services business. However, the writer does
not believe that such short term engagement will help them develop their professional
capabilities. As for the types of activist funds, market players prefer to join
“friendly” funds rather than “hostile takeover” funds. As for demand for people,
activist funds are looking to hire talented people.
Venture capital, which had suffered destructive damage from the collapse of IT bubble
a few years ago, was recovering and seeking to hire talented people. But both of venture
capital firms and capitalists shifted their investment focus to buy-outs.
Real Estate Investment Funds
Bulk sale of banks’ distressed assets started in 1997 in Japan. Foreign investment
banks and overseas investment funds had purchased a huge value of distressed assets
from Japanese banks in financial struggle at very low prices (almost 10% of face value).
They either sold them to other investors or collected them to earn huge profits. In
most cases, distressed assets contain real estates as collateral. Starting with such
distressed business, major foreign investment banks expanded to the real estate
business bringing in overseas real estate funds.
Meanwhile, in the middle of 1990s Japanese independent real estate management firms
were created, in most cases to engage in due-diligence, serving overseas funds. Then,
they established their own domestic real estate funds. Since then, they have expanded
quite successfully and dramatically. In most cases in the initial stage, their
business model was to purchase claims on the real estates of bankrupted borrowers,
such as buying office buildings from banks. They applied their due-diligence
capabilities and DCF methods to assess the fair value, which methods had been
introduced from the U. S. market. They provided remodeling of office buildings, and
sold them to other investors. However, since such a simple business has become less
profitable these days, they are trying to create more value-adding investment
businesses, such as developing of large scale real estate projects and providing
professional operating services to manage real estates such as hotels or office
buildings under their management.
In fact, performance of real estate fund management firms still keeps growing and
executives of these management firms express optimistic views on their future
performance as well.
On the other hand, Japanese mega-banks have almost disposed of their bad-loans, and
real estate investment opportunities given by the banks have significantly decreased,
and in addition, official land prices in 23 wards of Tokyo have begun to rise for
the first time in 15 years. These reflected both improving financial positions of
Japanese corporations and aggressive investment in the real estates with the huge
money flowing into the market reflecting excessive liquidity both from domestic and
overseas markets. Therefore, investment opportunities with good returns are becoming
unavailable. Moreover, in most cases investors have to join auctions and compete by
bidding. For example, the cap-rates for investment in good office buildings in the
central Tokyo at auctions, have declined to 3% level, by which is said very difficult
to earn profits.
Since competition is becoming intense to push real estate prices surge, some market
players are concerned that the current real estate business would be in “bubble.”
However, the writer does not support the view of a real estate “bubble” because
the value of real estate in Japan is still on the downward trend as a whole. And the
areas regarded as in a bubble state are limited to major cities of Tokyo, Osaka and
Nagoya. It is too early to conclude that the Japanese real estate business is in bubble.
Under the paltry 2% economic growth of Japan, if real estate prices and rents of office
buildings go up at particular areas in economic expansion, the value of other assets
and in other areas must be falling down. Therefore, in order to secure stable expansion
in the real estate business, the industry needs to develop value-creating business
to support dynamic economic growth.
However, as a whole, the Japanese real estate investment business is still expanding,
solving the problems and changing their business focus. The outstanding balance of
private real estate investment funds stood at 3.3 trillion yen and public funds of
J-REIT at 2.6 trillion yen as of the end of 2005. This growing trend will continue
and total balance of both Japanese and foreign real estate investment funds is said
to grow to more than 10 trillion yen by the end of 2006.
(Demand for people)
Under the industry environment as above explained, some real estate investment funds
seek to join projects from the start. They seek to develop shopping malls or commercial
facilities in front of large train stations, and offer proposals of unique financing
schemes such as innovative securitization and low cost finance. Some foreign funds
specialize in investment in distribution facilities such as warehouses, and offer
their expertise. Some funds provide professional property-management services to the
invested office buildings to improve efficiency in operation. Others focus on their
strong areas such as hotels, resorts, and leisure facilities like skiing resorts or
golf courses. The operation of those funds requires specific expertise and needs to
hire such professionals. If the industry cannot secure those professionals and produce
new value, the real estate investment business will face a real “bubble.”
Non-recourse loans for real estate investment are provided aggressively by Japanese
trust banks, mega-banks, foreign banks, Japanese and foreign securities firms as major
lenders. The loans by major Japanese banks currently stand at as large as 4 trillion
yen, and regional banks are also expanding the loans. Therefore, there is still strong
demand, particularly from Japanese banks, for people experienced in the sourcing and
execution of real estate non-recourse loans.
One of the “exit” strategies for real estate investment is sale to domestic financial
institutions, pension funds, and overseas investors. Those investors are increasing
investment in real estate opportunities as alternative investment. Demand for
professionals for this business was steady. Some overseas investors expanded
investment in the Japanese real estates to seek higher returns as they were
disappointed with declining returns in their domestic real estate holdings. Some
investors sought for a modest yet stable return as well. Therefore, some Japanese
private real estate funds and J-REITs targeted such overseas investors to sell their
products, and had demand for marketing staff.
3. Asset Management Business
Conventional Asset Management
Conventional Asset Management, which is engaged in fund investment targeting market
benchmarks such as TOPIX, seems to have hit the bottom and been turning around. The
recovery has been seen both at investment trusts, and investment management contracts
for institutional investors.
For investment trusts, we confirmed the recovering trend, seeing that the outstanding
balance of listed equity investment trusts stood at 34.8 trillion yen, as high as
at the last peak in May 1991. Adding 10.8 trillion yen of listed bond investment trusts,
total balance of listed investment trusts rose to 45.6 trillion yen (another statistic
indicates the figure rose to 55.3 trillion yen as of the end of December, close to
the industry target of 60 trillion yen). In addition, private investment trusts
achieved an historical high balance of 22.1 trillion yen.
However, some pointed out the investment trusts should expand further since the
outstanding was still very low compared with the U.S. mutual funds. They also pointed
out that the increase in the outstanding was attributable chiefly to the growth of
particular investment trust, “Global Sovereign Open,” with an outstanding balance
of about 4 trillion yen, and that the popular funds such as BRICs funds were mostly
foreign bond types (foreign bond investment trusts are in the category of equity
investment funds in Japan). They pay dividends to investors on a monthly basis, which
attracts elderly investors. However, ordinary Japanese equity investment trusts did
not grow as much as foreign asset funds.
Expansion of Japanese 401(k) is required for further growth of investment trusts.
Japanese 401(k) was introduced in October 2001, but has not expanded as originally
expected. Number of 401(k) contracts for corporate employees grew constantly and has
reached to over 1.5 million, but the number for independent individuals is still only
around 50,000. This overall slow growth is attributable to several factors, chiefly
to the lack of advantages such as low limits of premium to be paid by individuals.
Another driver for the growth of 401(k) will be the continuing recovery in the Japanese
As for the investment management contracts for institutional investors, the
outstanding balance of 125 contracts with authorized discretionary investment
agreements stood at 124.2 trillion yen as of the end of September 2005 thanks to surging
stock prices. That balance was the historical high having increased by 16.3 trillion
yen (up 15.1%) from the end of March. Particularly, money from overseas increased
by 29.4 % from the end of March.
(Demand for people)
Even though conventional asset management business, both at investment trusts and
investment management contracts, has been recovering as explained above, demand for
people remained weak. One of the reasons for that was that the increase in the balance
was basically attributable to the rise in stock prices. And, most of new investment
management contracts had been given to passive style management firms. Therefore,
the increase in the outstanding balance under the investment management contracts
did not generate a good demand for people. As for demand for people in investment
trusts, banks, which sold more than half of all investment trusts at their windows,
procured the staff internally and did not hire from outside sources.
However, the basic reason for the weak demand for people was that Japanese asset
management firms had not conducted drastic job cuts when they were in troubled times
three to four years ago, and therefore still held hidden unemployment within their
As explained in this report, though we saw strong demand for people for most financial
businesses, we did not see this to be the case for the conventional asset management.
Alternative Investment, adopting alternative investment methods are now attracting
investors ’ attention in this market. These include hedge funds, real estates,
commodities, and private equity. Here we analyze hedge funds and their demand for
Total value of hedge funds in the world market rose to 1.2 trillion dollars at the
end of last year. But, this figure accounted for less than only 1 percent of total
value of all financial assets in the global market. However, the influence of hedge
funds should be regarded as significant, since the funds usually use leverage through
borrowing and take strategic actions. There are various hedge fund styles such as
global macro, market neutral, long/short, CB arbitrage, event driven, distressed
securities, etc. In addition, there is fund of funds investment, which invests in
other funds diversifying investments designed to minimize risks. Performance results
differ according to the styles and market conditions.
Now there are 12,000 hedge funds in the world and 15,000 hedge fund management
companies registered at SEC in the U.S. As the number and the volume of hedge funds
continued growing, the performance results in the business as a whole declined.
Actually, the average performance result of hedge funds (HFRX Index) is currently
as low as 3% level, and there are not many funds which achieved over 10% returns.
According to industry sources, about 500 funds are performing well but among them
only 10% could be rated successful.
Under the above environment, hedge fund investments by Japanese investors expanded.
The outstanding balance of hedge fund investments by Japanese investors stood at about
8 trillion yen, among which life insurers was the biggest investor, investing about
1.6 trillion yen. Investments by banks such as mega-banks, trust banks, regional banks,
and shinkin banks (small local banks) amounted to about some 6 trillion yen. However,
compared with securities investment by Japanese banks whose outstanding balance was
as huge as approximately 100 trillion yen, hedge fund investment was very small. (The
ratio of securities investments against total deposits of banks is about 25% at present,
and most of the securities invested are Japanese government bonds). Under the current
environment where the risk of investment in Japanese government bonds is clear as
interest rates are expected to rise sooner or later, there would be much interest
in alternative investments. In facr, Japanese banks purchased hedge funds
aggressively (most of them are fund of funds). This trend was a reason why the year
of 2005 was called as “the first year of Japanese banks’ investing based on their
（Demand for people）
Under the current environment as above explained, banks sought to hire fund managers
to invest in hedge funds i.e. fund of funds. The hiring need was for “gate-keepers.”
They travel to New York, London and Hong Kong to find such excellent fund managers
as could be called “Ichiro” in the fund management business. Therefore, gate-keepers
must have excellent selection capability for excellent fund managers and funds.
However, since there were only a few truly professional gate-keepers among the
Japanese, Japanese banks had to accept semi-professionals. Banks also had hiring needs
for professional staff in risk management and operation of the hedge fund business,
but banks could not hire good ones. Basic reasons for the Japanese banks’ failures
to secure professionals for these businesses was not only the scarcity of such
professionals in the market but the banks’ out-dated hiring policy. Japanese banks
are reluctant to delegate the authorities to the hired officials and pay fair
compensation. Banks argued that the job of fund of funds investment was simply to
invest in funds invested and managed by outside professionals. Banks do not see any
specific expertise necessary to conduct the investment. This stance represents
management philosophy of Japanese banks: they little appreciate professionalism in
Some U.S. and European hedge funds opened Tokyo offices to invest in Japanese equities
and tried to hire professionals. This move would be a reflection of the recovering
trust of overseas investors in Japanese equities. Therefore, there was a good deal
of demand for professionals for this investment. On the other hand, many professional
Japanese equity traders and fund managers tried to seek jobs at top-tier overseas
hedge funds. However, few obtained the jobs because most applicants did not have
successful track records for hedge funds investment.
Some traders established their own hedge fund management firms and tried to raise
funds. They had good track records having developed their own unique investment
methods and quantitative investment models. Though some succeeded, most of them faced
the difficulty to raise funds, even seed-money. It seems that the market did not regard
good performance achieved at his major financial institution as the player’s own
track record, commensurate to a new, outside position. The market regarded it as his
team’s record. However, around the end of the year, the market environment for hedge
fund players changed, and funds were becoming available to good fund managers,
reflecting the affluence of money in the market. In addition, we saw new businesses
emerging related to hedge funds, such as those who provide various infrastructures
to newly established hedge funds, like “ prime brokers ” and “ administration
managers.” As such various problems being solved, hedge fund business grew in this
market. We would like to see more professional Japanese hedge fund managers playing
in the global market.
Major overseas hedge funds strengthened their marketing/sales capability in Japan.
They sold their products through their tie-ups with foreign financial institutions
in Japan or through their own Tokyo offices. There were hiring needs at both
Demand was for structurers who create investment trusts to follow the Japanese
regulations and to minimize the risks involved with the products, by providing
sophisticated guaranty schemes to secure par-value of trusts (fund derivatives,
Demand was also for marketers who have an extensive customer network with financial
institutions, and have in-depth knowledge of hedge fund schemes such as
fund-derivatives. The hedge fund marketers are also required to explain the risks
involved in the funds, particularly when they sell to Japanese banks and securities
firms for their retail customers (particularly to the wealthy people). They have to
help the distributors understand on the products. We also saw some consulting firms
looking to hire professionals who cover pension funds. They provide services to help
them with selection of funds, evaluation of performance, and risk analysis.
As for the Basel Ⅱ regulations, Japanese banks are set to apply the new regulations
from the end of fiscal 2006, but the market was confused with the new rules particularly
on banks’ hedge fund investment, Some say the risk weight on hedge fund investment
by banks will be 1,250% if the contents of the funds cannot be clearly analyzed, but
others deny such understanding. Therefore, some regional banks were reluctant to
increase the investments. The confusion created a negative impact, to some extent,
on hiring needs for marketing staff of the product covering banks. Meanwhile, foreign
investment banks created ideas and schemes to avoid Basel Ⅱ regulations, aiming to
help them buy more hedge funds. Such activities are unique to foreign investment banks,
which tend to seek profit opportunities under any circumstances.
4. Credit Risk Business
Indirect financing (banking) as opposed to direct financing (securities business)
has been overwhelming in Japan’s financial services industry since the end of the
last war. It was the MOF’s strategy at that time to achieve the nation’s objective
to recover from the defeat in the war as quickly as possible, guiding commercial banks
to provide funds concentrating on the core industries. In those days, banks were put
in the center of the Japanese financial services industry in line with the MOF’s
strategy. In fact, when the writer was a young banker, commercial banks provided debts
to borrowers as de-facto equity finance, and were deeply involved in the management
of companies. Therefore, bankers in those days were required to possess strong insight
into what banks should finance for. However, since then competition among financial
institutions had been intense due to the expansion of the Japanese economy and the
deregulation policy pursued by the government, and that trend finally created the
financial bubble. During that time commercial bankers lost their sense of mission
as a banker, and became mean pawnbrokers who loan money against real estates put up
as collaterals. They did not pay attention to the business itself of borrowers. On
the other hand, securities people did not pursue their business thoughtfully saying
that equities were simply risk money. They did not conduct earnest analysis on
corporate value versus stock prices, and traded and underwrote shares only based on
demand and supply conditions. Reflecting those stances in the market, the Nikkei Stock
average grew to as high as 40,000 yen at the peak in 1989. But finally, the
bubble collapsed and Japan experienced a “Lost Ten Years.”
(Demand for people)
Understanding on credit risks
The market clearly indicates that bankers who possess deep knowledge and professional
experience in the credit risk business will play in the center of the financial
services industry from now.
“Credit risk” is the most important factor when to analyze “corporate value.”
The right side of balance sheet of corporation (debt and capital) constitutes senior
debts, junior debts (subordinated loans or mezzanines), and capital. The risks
involved in those financial instruments are ranked in a chain following the degree
of risks and are correlative (as K・M・V analyzes). Therefore, the expected return
of each instrument has to be calculated according to the degree of each risk being
reviewed with correlation with other credit risks. However, traditional Japanese
financing has handled these credit risks as independent to each other, and ignored
the risk/return policy. In other words, Japanese banks have historically been taking
only senior credit risks, avoiding high credit risks. Securities firms have handled
equities as lump of risks. However, there must be a part in the balance sheet standing
between the two instruments in terms of degree of credit risk. Now, the market is
paying more attention to higher credit risks and seeks for relating new business
Furthermore, it is well known that credit risks are part of corporate value, and that
corporate value constitutes both treasury value and knowledge value. Treasury value
is represented in the balance sheet and the profit and loss account. Knowledge value
is abstract and is not shown on the balance sheet, but will be realized as treasury
value in the future. Knowledge value is made of “formalized knowledge” such as patents
or designs of new cars as well as “tacit knowledge” such as corporate culture and
management. Therefore, handling credit risks without analyzing knowledge value of
the borrowers makes no sense. We expect financial professionals who are engaged in
credit risk business to extend understanding of the relation between corporate value
and credit risks.
Challenging high credit risks
There was strong demand for professionals who can analyze and structure credit risks
involved in a transaction. In fact, the technologies to structure credit risks are
used for various financings, such as asset finance, real estate finance, business
finance, and finance for M&A or private equity. The profile of ideal candidates will
be explained in the section “Finance.”
Financing by Japanese banks (corporate lending) is aimed to obtain market share. They
extend loans without applying interest rates commensurate to the degree of credit
risks. As a result, the average interest rates at their loans have constantly been
declining. On the other hand, major foreign investment banks in Japan have groups
responsible to promote high yield finance for such opportunities as real estate
business and structured finance. The groups, which are usually consisted of foreign
professionals, seek to apply sophisticated analytical capabilities for high credit
risk deals. However, Japanese banks compete against them offering very cheap financing,
which frustrates foreign professionals. Japanese banks still seek to secure large
profits in volume. It seems that Japanese banks are going down the same road as they
did in the past, to develop huge amounts of bad loans again. Japan’s FSA is much
concerned about the move and is considering taking a full-scale measure to inspect
banks’ lending practices and portfolios. FSA is said to take it through the
implementation of Basel Ⅱ regulations. Then, Japanese banks would be forced to adopt
appropriate risk/return credit policy.
Recently a major Japanese securities firm entered the credit risk business (it is
not the trading of investment-grade corporate bonds). If the firm aims to establish
the credit risk business as financing, we believe it too difficult for securities
people, because the high credit risk business is essentially different from the market
risk business. The market risks such as bonds and foreign exchanges can quantify risks
involved. However, credit risks basically cannot be quantified, and high credit risks
are difficult to sell out in the market, particularly in the conditions where the
quality of credit risks deteriorates. Also, expertise in the credit risk taking
business can be obtained only through long struggles in lending as commercial banks
have experienced with their bad loan problems. Securities firms should not enter the
credit business unless they are ready to take on such troubles.
Trading credit risks
In the last several years the credit derivative market (CDS: credit default swap)
has been rapidly expanding in the world market. The outstanding balance of credit
derivatives on a notional basis stood at 12 trillion dollars as of the end of June
2005, grown by 2.3 times from a year earlier. ISDA rules for this product were in
place. In the overseas markets, professionals in bond, CDS, and equity were trading
their product referring to the other markets. In addition, some hedge fund managers
frequently use CDSs, and the expanding synthetic CDOs use CDSs.
However, the market of CDSs for Japanese credits was small yet, accounting only for
1% of CDSs of the global market. This was because the Japanese CDS market had been
moving in one direction, as Japanese financial institutions, the major players for
this product, always sold CDSs in order to earn guarantee fees. These actions distorted
the market. Foreign financial institutions blamed Japanese banks for destroying the
Japanese credit risk market. However, just recently the credit market in Japan became
active due to several factors such as the recovery of the Japanese equity market (money
from financial institutions now flows to the recovering stock market), the GM shock,
and the down-gradings of some corporate bonds such as at Sanyo Electrics. The credit
risk spreads in CDSs and corporate bonds widened, and credit risk prices were becoming
fair. Trading of high credit risk bonds also become more active, and investments in
CDOs (synthetic and cash) and CLOs grew in the market.
Therefore, this business had a good demand for the experienced people. Candidates
in need were traders of CDS (sought at both Japanese and foreign financial
institutions), structurers of foreign CDOs (structuring of Japanese CDOs are still
very difficult), traders of CDOs, as well as marketers of these products. Traders
of bonds with BBB level credit ratings were also sought for. But staff for credit
risk management at banks were procured internally.
Analysis on credit risks
Demand for analysts on credit risks increased. The needs were at rating agencies and
foreign financial institutions. Experienced people for this analysis were very scarce
some years ago and were not available to hire, however such professionals have now
increased and have become available to some extent. Now in demand are quantitative
credit analysts for various credit businesses.
As such, demand for people in credit risk business in general was strong, and it is
predicted the business will continue to grow according to the improving financial
environment in Japan (i.e. rising interest rates).
As reported above, when M&A and fund investment are proposed, debt financing is offered
as well, in order to boost profits. At this time, capabilities to finance high credit
risks are more in need. As such, demand for people in various finance businesses
(Demand for people)
MSCB (Moving Strike Convertible Bond)
MSCBs are used by weak credit firms. With this product, securities underwriters can
secure at least 10% profit from a transaction even if stock price drops after the
instruments have been issued. When underwriters use short-selling strategy along with
this product, if appropriate, they can earn more profits. This product was introduced
to this market by the revision of Commercial Code in late 1990s. Recently Lehman
Brothers was said to have earned some 15 billion yen by providing this product to
Livedoor Co. for its acquisition of Nippon Broadcasting System, Inc. Number of MSCB
issues in 2005 totaled to 14, and total value amounted to 220 billion yen. In early
of 2005 there was strong demand for marketing professionals of this product. However,
the product turned out to be unpopular in the latter half of the year due to the dilution
of equities for existing investors as well as the mass-media’s negative coverage.
Potential issuers became reluctant to issue, being concerned about market reputation.
Therefore, demand for people declined.
However, rather small corporations continued to use this product, issuing a relatively
small value of MSCB. Corporate marketing teams at investment banks which handled
relatively small listed corporate customers continued hiring marketers to promote
this business. Such investment banks agued that they sold MSCBs to their affiliated
overseas funds to manage them as a portfolio investment, and did not sell out to the
market to gain profits immediately after underwriting.
As reported above, we now see that M&A, fund investment and financing are leveraged
in the same deal. Those are offered cooperatively, e.g. finance people are asked for
support by investment funds to improve investment efficiency and by M&As to procure
money necessary to complete big deals. In return, finance people approach investment
funds and M&A bankers to seek more business opportunities. Financing for ordinary
credits is offered by Japanese banks and trust banks, and finance for higher credit
risks is proposed by foreign investment banks applying their highly analytical and
trading capabilities. According to statistics, total value of LBO/MBO finance by the
three mega-banks stood at 1.4 trillion yen, an increase by 0.2 trillion yen from the
previous year. This trend will continue, as will the rise in demand for staff. Hiring
needs will come both from mega-banks and foreign investment banks.
Asset finance was very active being applied for various assets such as real estates,
account receivables, consumer finances, and medical institutions’ claims. When they
provid financing, the arrangers usually establish SPCs, and invite equity investors
for the equity portion and procure funds for the debt portion through non-recourse
loans. Non-recourse loans are collectively structured to CMBSs for sale to investors.
Trust schemes rather than SPCs are also often used.
Capabilities required for young staff were in valuation, assessment of real estate
value as collateral, due-diligence, balance sheet analysis, cash-flow projection,
credit protection schemes with various covenants as well as knowledge on laws,
accounting, and taxes related to the execution business. Trust bank staff with the
knowledge of the trust schemes were also in great demand. All of these areas of
knowledge and experience were required in most financial services such as M&A, but
one person was not necessarily expected to have all these capabilities.
Young staff in charge of execution were very busy and had to work all day long through
the year, and were called “slaves” in the financial service industry. There was
also strong demand for professionals in sales of CMBS and ABCP. The sales staff belong
to the fixed incomes sales department covering financial institutions in the central
areas and regions.
Profitability in securitization for traditional assets such as receivables and
consumer financing declined. Some financial institutions closed their operations for
the business. In the meantime, securitization for new assets rose. These were for
claims on medical services, pachinko game instruments, funeral services, and various
soft assets such as movies, etc. Since the asset finance extends finances to the
projects and not to the originators, the banker had to have capabilities to analyze
business risks rather than corporate risks as a whole and collaterals. In other words,
it is widely recognized that the securitization business would be profitable only
when pursuing “ business finance ” targeting the business itself, rather than
targeting the assets as “asset finance.” This move was seen both at foreign investment
banks and Japanese banks.
Mezzanine and Subordinated Loans
Return has been falling in financing and securitization for real estate investment,
MBO/LBO, and private equity. When SPCs are created for those businesses, they usually
procure about 70% of funds through non-recourse loans. But these days they finance
75-85% through debts in order to raise equity return. They often use subordinated
loans or mezzanine finance for the schemes. People who have expertise for these
financings were in great need.
Required there were capabilities to analyze such high credit risks and to provide
pricing for them. Such professionals are in great demand due to their extreme scarcity.
We expect two routes for quality bankers to grow to become professionals in high credit
risk finance: ① commercial bankers who have experienced only with senior credit risk
finance but have deep thoughts on high credit risks, and want to upgrade their
capability down to junior debt financing, and ② investment bankers who have
experienced only with equity underwritings but have deep understanding on various
equity financings, and want to expand their knowledge up to debt financing. Reflecting
this market trend, some overseas funds came to Japan to provide mezzanine financing,
and sought for staff. Japanese banks also established mezzanine funds and invested
in other mezzanine funds. It is a clear trend that demand for people qualified in
this business will grow.
Asset Backed Securities (ABS)
Non-recourse loans for real estate and various other assets are restructured to
securities. The securities are sold to various investors such as pension funds. Total
value of ABS issuance in 2005 stood at 6.2 trillion yen, which surpassed 6.1 trillion
yen of corporate bonds. The increase was significant, up from about 4.0 trillion yen
issuance in 2004. The outstanding balance of ABS was second only to that of Japanese
The significant expansion of ABS was attributable to the increase in issuance of
residential mortgage backed securities (RMBS). In 2005, RMBSs were issued by 2.9
trillion, which accounted for approximately 47% of all AMS issuances. The large amount
of ABS issuances generated a great deal of demand for execution staff both at foreign
financial institutions and large Japanese securities firms. Their jobs included
cash-flow projection, restructuring cash-flows, making securities, and obtaining
credit risk ratings.
6. Syndicated Loans
Mega-banks strategically expanded syndicated loans as a major source of revenue as
well as a leading product to promote “marketed indirect financing”. The outstanding
balance of these loans by all banks now stands at over 20 trillion yen. However, as
was pointed out by the market people, these loans have become a product for banks
to generate profits by forcing weak credit borrowers to take, though they can borrow
loans on ordinary conditions. Banks can earn additional fees from the arrangement.
This business created demand for people at mega-banks.
7. Bonds/Derivatives/FX business
The Fair Trade Commission of Japan ordered one of the mega-banks to review its business
operation. It was reported that the bank had forced middle-sized and small corporate
borrowers to buy derivatives that the borrowers did not need. As were the cases with
syndicated loans, banks took advantage of their influential position over the
borrowers. The Commission regarded the derivative business as an “ unfair ”
transaction. However, other banks also, more or less, promoted that business to raise
profits under intense competition in lending.
Major foreign financial institutions also had a good deal of demand for professionals
in fixed incomes sales for regional banks, corporations, and mid-markets. Producing
structured bonds taking advantage of their cutting–edge technologies and strong
global trading capability, some of them earned good profits from selling these
products to the above customers directly, and through small and middle-sized
securities firms as distributors for their retail customers. Among them, one major
foreign investment bank is said to keep raising a very large profit from derivatives
marketing to corporate customers.
However, the general trend we saw in the market was declining profitability in the
fixed incomes and derivatives business at foreign financial institutions (they call
the division “Global Markets”). Foreign financial institutions used to earn huge
profits from derivatives during 1990s. In those days these products generated
approximately 60-80% of all profits of the Tokyo branch. However, we do not see such
high profitability now, since even Japanese banks have the abilities to produce
ordinary structured bonds at present. Moreover, we see a huge difference between
mega-banks and foreign financial institutions in their customer bases. Therefore,
foreign financial institutions have to concentrate their resources on creating very
complicated securities to survive. However, it is widely recognized that only ten
to fifteen foreign institutions will make it in the market.
In the FX business we recently saw a good number of reputed professionals at foreign
exchange specialty firms and foreign banks changing jobs. These moves probably
reflected the market situation where investors were buying foreign currency
denominated financial instruments under the global “excess money” situation. However,
we are not sure if this trend would continue for long. We have often seen foreign
banks expanding their FX business operations in Tokyo and then moving them back to
the overseas offices such as Singapore and Hong Kong in consideration of cost
efficiency. Therefore, if they cannot create and offer a value-added FX business they
have to shrink their Tokyo’s operations again when the volatility of these products
This business needs to develop attractive products such as long-term FX and exotic
schemes if they want to survive.
As for other businesses, mega-banks were prepared for intermediary business for
securities business, which was recently allowed for banks to enter. They, however,
had already hired the staff for the business including from outside sources, and did
not have additional demand for people.
Overseas investors bought more Japanese stocks than they sold, by 10 trillion yen
in 2005, and the trading volume by individual investors accounted for 38% of all
Japanese stock transactions. As a result, the Nikkei Stock average rose by
approximately 40% in the last year, and the total capitalization of the Tokyo Stock
Exchange rose to over 500 trillion yen, for the first time in 15 years. However, we
did not see much demand for professionals in conventional equity business. This was
probably because overseas investors traded through their foreign securities firms
and major Japanese firms, and individual investors traded through internet securities
firms in day-trading.
9. Wealth Management
According to statistics, only 1.5% of all Japanese households (780,000 out of 49
million in total) has more than 100 million yen in personal financial assets for each,
among the total personal financial asset value of 1,500 trillion yen nation-wide.
Various financial institutions tried to obtain wealthy customers to help them manage
and grow their financial assets. The wealth management business include various types
of businesses such as highly reputed traditional private banking in Swiss, wealth
management developed in the U.S. investment banks, personal banking of Citibank Tokyo,
priority banking of European universal banks, etc. Japanese securities firms
aggressively sold “wrap accounts” to rich families. However, due to the difficulty
of establishing a long lasting, promising strategy for the Japanese private banking,
many foreign private banks have tried to create the business for this market, but
have always been unsuccessful. Therefore, though there was some demand for private
bankers, it was not as strong as in the previous year.
Mega-banks also strengthened their wealth management capabilities using banks’branch
networks, affiliated trust banks, securities firms within the groups, etc. Some banks
tied up with overseas private banks for their high quality products. We believe if
the banks want to succeed in this business, they have to secure professional private
bankers from outside sources who will bring in innovative ideas, and to establish
new internal organizations. They also have to create internal management systems such
as a revenue-split rule between existing account managers at branch offices and
professional marketers hired from outside sources for this project. However, most
Japanese banks waned to pursue this business without reforming any existing system,
being afraid of creating internal conflicts. Moreover, they do not have any philosophy
or strategy on how to conduct “true private banking.” Therefore, professional private
bankers in the market did not apply to the Japanese banks.
Chapter Ⅱ Analysis By Financial Institution
1. Mega-bank reform and the demand for people
Japanese mega-banks, which have solved their immense bad-loan problems, have an
overwhelming influence over the Japanese financial market. Market players often tell
us that almost financial businesses are streaming to the three mega-banks, although
we do not have any statistical figures to confirm the situation. In addition,
professionals of foreign financial institutions said that their competitors used to
be other foreign firms in the past, but they now have to compete in most cases with
mega-bank group firms. Now the focus of mega-banks’ management is on “profitability,”
having shifted from “soundness”. In order to make money under the present environment,
all three mega-banks have strong demand for people, to handle the huge customer deal
flows, although we see a difference among the three in strategy for hiring.
It is predicted that each mega-bank will achieve a huge operating profit of between
5 billion yen to 1 trillion yen every year from now, and will steadily increase its
capital. Sooner or later, the mega-banks will pay back all public finances to the
government and gain freedom for their HR management. Just a couple of years ago many
people in the market made cynical remarks that the bank and the securities firm within
the same group were not getting along and that political war was taking place among
staff separated by former banks. However, they now respond to this rumor, saying that
mega-bank employees are too busy to join such internal politics. We were pleased to
know the mega-banks had begun to move forward towards reform.
Meanwhile, Mr. Heizo Takenaka, currently Minister of Internal Affairs and
Communications and one of influential lawmakers of the ruling party recently said
at a press conference that only the reform of corporate governance at the mega-banks
had been left unachieved yet among the “Takenaka Three Principles” that he had mandated
for the Japanese financial institutions some years ago. He added that the other two
principles of the strict assessment of mega-banks’ assets and the improvement of
their capital ratio could be deemed realized. We could agree to his comments and also
have concluded from our experience that mega-banks have not changed their corporate
governance system at all even after the so-called “ Lost 10 Years. ” Both the
capitalization of mega-banks and their asset size have become among the biggest in
the world market, but their profitability is still very low compared with top class
financial institutions elsewhere in the world. The reason for the problem is that
mega-banks have never adopted the “capital cost management” policy. Since most
Japanese banks are not managed with the “committee-based governance” stipulated
in the recently revised Japanese corporate laws, top executive officials of Japanese
banks are nominated and selected by the development of internal political events (such
as favorites of the president or those who seem to be getting along with other
executives), and not based on the capitalistic judgement and the degree of mission
that candidates have set to themselves. Therefore, those who vocally demand drastic
management reform are usually not appointed top executives.
Mega-banks do not have a CFO post in their management structure, which most Japanese
corporations already have these days. So, capital allocation and treasury operations
are not managed in a capitalistic way. In addition, in the Japanese banks, executive
committee members usually do not speak about matters in the charge of other executives
as they do not want to create internal confusion. “Respect for Unity” is the culture
deeply rooted in the Japanese society. Therefore, no one expresses questions or
objections to the management decisions and strategies of other executives even if
the operations are not properly run. Therefore, executives have freehand for their
operation, and pursue their business in the way they want. Or they may just follow
conventional practices, such as overstaffing for unprofitable areas. For example,
the lending business is a core source of revenue for banks, and they are trying to
increase outstanding of loans with competition intensifying among banks. They,
therefore, dump interest rates, which is their traditional strategy to win customers.
As a result, Japanese banks do not earn enough interests to cover relevant credit
risks, however, the banks do not care.
Another example is that HR management of Japanese banks is still based on the
traditional system of “promotion by age.” Japanese banks hire people from outside
sources only because they are very busy in their daily operations, but not to pursue
a mid-term or long-term corporate strategy. They do not intend to introduce a
performance based HR system because they basically do not appreciate professionalism
in business. They highly appreciate generalists as they believe generalists have a
sense of balance. Therefore, compensation of Japanese bank employees is quite low.
However, when they need to hire professionals with specific skills from outside
sources, Japanese banks have to offer higher compensation to attract them than to
existing employees, but the new employees question on the reasoning for the higher
amount of pay. As such, we see far too many problems with the management of Japanese
banks and see no sign that they have begun effort to change. In our “HR Market Report-2”,
we sent questionnaires as to the quality of the management of the Japanese banks to
about 3,000 in the financial services industry including executives of Japanese banks.
Most of the executives answered that the management of Japanese banks is unacceptable.
However, we are not asserting that all of the mega-banks have lost the sense of mission
or the pledge to improve Japanese financial business. We see a difference in the degree
of commitment among the three banks. In fact, there are many executives and bankers
who are exerting efforts to push reform forward with the strong sense of crisis. We
respect them and are trying to help them providing information on the HR market. And
we believe that Japanese FSA will push forward its reform policy for the Japanese
banks with Basel Ⅱ regulations set to be in force soon. We expect that the FSA will
take a firm stance to urge the managements of Japanese banks to pursue fundamental
(Demand for people)
There was very strong demand for people at mega-banks and affiliated securities firms
in order to handle a great deal of financial deals provided by the huge influx of
customers. At banks, the strong needs were for structured finance (securitization
of real estates and other assets, and non-recourse loans), syndicated loans, corporate
advisory, M&A, and derivatives; and at securities firms, for M&A, fixed incomes,
derivatives, principal investment. The details of the needs are explained in Chapter
Compared with banks, which are still controlled by the government, securities firms
had more freedom in hiring. Securities firms could offer more flexible choices on
employment contracts, i.e. ① permanent employment contract as ordinary employment,
② term employment contract called “ professional contract ” , which are for
professionals who have specific expertise and are paid a performance bonus depending
on their performance results, ③ employment contract between the above two, i.e.
permanent employment contract, but for those who have specific expertise and are paid
bonus depending their performance results. These contracts were also applied to the
hiring at some banks. But for any of the employment contracts ① , ② and ③ ,
compensation is not comparable to that of professionals at foreign financial
institutions. In conclusion, the HR system and the compensation system of banks and
their affiliated securities firms are still out-dated. If Japanese financial
institutions seriously wish to expand profitability to compete with major financial
institutions, we believe they must carry out fundamental reform for the HR system.
The largest problem at mega-banks hiring professionals is the fact that department
heads and executives cannot be deemed professional at all. Except for very few cases,
the positions of department heads and executive officers at Japanese banks and
securities firms are never offered to people hired from outside. Senior positions
are given only to those who have been working at the same bank since graduation from
his or her university. They are treated as elite internally, and have been offered
various positions to be educated and trained to grow as generalists. They experience
these positions as job rotations to get prepared to become executives of their firms
in the future. Furthermore, most employees at Japanese firms have been and are still
put on a career course within the same bank, filled with the dreams to become executives
some day in the future. But these promises are never realized. That is the core practice
for Japanese HR system, which we believe is still effective at banks.
This iron-clad system seems impossible to destroy at this time and stands as a big
problem to professionals employed from outside. Because, a professional pursues his
business taking various risks and does not always win, and if his boss does not
understand why the loss took place, he as a subordinate professional cannot do a good
job. In conclusion, the reasons why Japanese financial institutions cannot hire
excellent professionals are with their HR system as well as low compensation.
Mega-banks, who are now ranked among most highly capitalized firms in the world markets,
are taking measures to expand overseas operations suitable for global banks, and are
looking for talented people in their overseas offices for this purpose. However, the
markets still remember that Japanese banks during the bubble times expanded their
assets in overseas markets, investing huge money with very low interest rates applied.
Japanese banks showed their presence in that way to the world markets in those days,
but eventually just piled up mountains of bad financial assets. The question now is
whether they have made the present strategy having learned from the past failures.
We are concerned that the mega-banks’ expansive strategy towards overseas markets
would be only because they would feel shamed if they do not have an operation big
enough to be suitable for world class banks. In addition, they now cannot use huge
money as they did in the past. We are closely monitoring how they pursue their overseas
As for demand for personnel for preparation and implementation of Basel Ⅱ
regulations, banks had already gathered enough staff internally and did not need to
hire from outside sources. Therefore, demand for people for the new regulations was
limited to at consulting divisions of accounting firms as well as at IT system firms.
2. Foreign financial institutions and the demand for people
As explained above, now, almost financial transactions in Japan are given to
mega-banks. The customer base of foreign financial institutions is too small to be
compared with mega-banks, and the advantage of foreign firms in technology is
disappearing. As such, we do not see a bright future, in general, for foreign financial
institutions in Japan, as we did during 1990s. On the other hand, top-tier U.S.
investment banks still stand out in the market, generating a great deal of profits.
In other words, we clearly see two tiers among foreign firms, separated by U.S.
investment banks and a few European universal banks versus the rest. Generally
speaking, European universal banks do not have established, clear strategies for the
Japanese market and were not operating successfully. Some of them were shrinking their
operations or leaving this market.
(Demand for people)
Demand for people at successful foreign financial institutions is still strong, but
mainly for the business areas in which they possess their greatest strengths. These
strengths are in principal investment, securitization, M&A, underwriting securities
issuances, fund investment, structured finance, high yield finance, hedge funds, fund
derivatives, credit derivatives, etc. In great need were professionals with excellent
track records for these businesses, as were young, smart aggressive bankers with high
Although it might sound contradictory to the above view, some major foreign financial
institutions claimed that they did not need super-stars any more. Strong demand in
the past existed for professionals who had obtained knowledge of new high-tech
products from their overseas offices and sold those products to customers in this
market. They achieved excellent performance applying his or her strong marketing
capabilities or unique strategies. However, these types of professionals are very
scarce now and are not in great need. This is because financial products with
cutting-edge technology have become scarce, and business value at major foreign
investment banks comes mostly from their global network or their brand name rather
than from capability of individual players. Therefore, even senior professionals at
foreign institutions are put in routine positions so that all staff members, whether
senior or junior, now look same. This trend frustrates professionals with excellent
records. This is a reason why foreign firms do not look attractive these days.
One of the concerns of top managements at the overseas head offices of major foreign
financial institutions is that they do not have many senior Japanese in their Tokyo
offices with high quality management capability. Overseas executives said to us that
they have many professional players who generate a great deal of revenues from his
or her specialty areas and earn a lot of bonus for their performance, but they do
not see managers who possess high degree of mission and vision set with them, in general.
They would like to employ such quality managers as have been promoted to managing
directors due to their excellent performance, and then can make excellent proposals
in strategy for the Japanese market to the head offices. They also pointed out they
do not have many professionals who can close big deals that could give significant
impacts to the Japanese business overall. We understand one of the reasons for the
scarcity of such bankers is that foreign firms choose candidates based too much on
their track records and skills rather than on their overall quality. We hope more
quality bankers from Japanese financial institutions move to major foreign
institutions and challenge in the global markets. We also hope excellent professionals
at Japanese financial institutions and foreign firms will compete, making full use
of their own capabilities and strengths, to contribute to improvement of the Japanese
Takafumi Horie called “Horie-mon” was arrested recently. There were various opinions
as to what Horie-mon had done to the Japanese business. The negative view saw a
political and social problem, seeing Horie-mon’s transgressions as the result of
Koizumi’ s reform policy. Others took a more positive view of Horie-mon spurring
positive change for the Japanese business and society. However, the writer will raise
an important question: who supported 700 billion yen of capitalization for Livedoor
Co.? The great deal of losses suffered by many individual day-traders was their own
responsibility. They traded stocks without knowing anything about the trading,
likenling stock trading to a high-tech pachinko game. But we should not overlook that
professional equity analysts of major financial institutions had recommended the
stock as a “buy.” This should be regarded as a serious “quality” problem of the
Japanese investment management business. The writer, who was a commercial banker and
is an amateur in the stock business, can easily tell after a quick look at the firm’
s financial statements that the Livedoor’s capitalization is not worth as huge as
700 billion yen. This judgement is just a common sense for commercial bankers and
investment bankers who have learned any financial analysis. If the analysts who
supported that valuation insist the 700 billion yen was fair, they must have visited
Horie-mon and the executives frequently, obtained insider information, and understood
their corporate culture having conducted many interviews with the employees. However,
we have not heard that they did. We, of course, know that stock prices are determined
not only on cash-flow analysis but also on demand/supply balance in the market. However,
if some simply assert that stock prices will continue to rise as long as people buy,
they have not learned from the past failures. As we still remember, people bought
stocks in the bubble times in that way, and suffered vastly destructive damage from
the collapse of the stock market. However, it is a great surprise and disappointment
to know that a highly reputed global investment trust management firm bought a great
deal of Livedoor’s shares to sell to individual investors.
We believe professionals in the financial services industry must always ask themselves
what constitute corporate value and what the stock prices represent.
Profile of the writer:
Katsunobu Komizo graduated from Tokyo University (International Relations) in 1968.
He worked for Sumitomo Bank for 16 years, and in 1984 moved to First Chicago Bank
as Head of the Relationship Management Group, to market various U.S. corporate finance
products. In 1989 he began his career in executive search as a consultant with the
Whitney Group Japan, a New York based search firm specializing in the financial
services industry. In 1993 he joined Heads Japan as Managing Director responsible
for the Financial Institutions Division. He became one of highly reputed executive
search consultants in the Japanese market with his frequent exposure to mass-medias
such as TV, news papers, writing for many professional magazines, speaking at
conferences, seminars, etc. He is also well known in the market for the successful
completions of many assignments given by clients both from foreign investment banks
and Japanese major financial institutions. He left Heads Japan in 2004 to start his
own company, Executive Search Partners.
Company statement and purpose:
Executive Search Partners is the first true executive search consulting business in
Japan. Founder and CEO Katsunobu Komizo is building the consulting business based
on his 17 years experience, philosophy, business knowledge, and human relationship
networks. Executive Search Partners is approved by the Japanese government as a
licensed recruitment company.
For details about ESP, please refer to its Web Site (www.espartners.co.jp).